Life Insurance Basics

Applicant

The person who applies for a policy. The applicant may or may not be the insured under the policy.

He/She does all the legwork involved with filling out an application.

Policy Owner

(Policyholder)

The person who exercises all ownership rights in the policy, including canceling the policy, making policy loans, making and changing beneficiary designations, selecting dividend options, selecting or changing the payment mode, etc.

Is usually the same person as the applicant, but that's not always the case.

Insured

The person who's life is the subject or object of the policy.

It is the death of the insured that will trigger the death benefit to be paid out under the life policy.

Beneficiary

The person(s) or organization(s) that is/are named by the policy owner to receive the death benefit upon the insured's death.

What is Insurable Interest?

- An interest based upon a reasonable expectation of pecuniary (financial) advantage through the continued life, health, or bodily safety of another person AND consequent loss by reason of that person’s death or disability; OR

- A substantial interest engendered by love and affection in the case of individuals closely related by blood or law

When is Insurable Interest required to

exist in Life insurance?

In life insurance, policyowner must have insurable interest in the insured/proposed insured ONLY at the time the contract becomes effective

Insurable interest does NOT have to exist at the time the loss occurs.

Steps in the

Personal Insurance

Planning Process

1) Identify goals and priorities

2) Gather data

3) Analyze data and create a plan

4) Implement personalized plan

5) Review and monitor plan

Human Life Value

Approach

Method for estimating an appropriate amount of life insurance based on the insured's actual financial contribution to his/her household. Factors considered include:

1) insured's income

2) projected pay raises

3) value of household services provided

4) employment benefits (e.g. health insurance for family)

5) taxes

6) time value of money

Needs Approach

Method for estimating an appropriate amount of life insurance based on the amount of money that would be required by the insured's family to cover their needs. Common needs considered include:

- Funeral and final expenses, mortgage or rent expenses, credit card debts, loans (auto, personal, etc.), education costs for children, estate/gift taxes, probate fees, medical expenses, emergency fund, etc.

Limit of Liability

(Measure of Liability)

The amount the insurer is obligated to pay under a life insurance policy upon the insured's death.

(Limit of Liability = Face Amount - Outstanding Policy Loan - Loan Interest)

Explain this phrase:

"Life insurance creates an immediate estate."

- Firstly, someone could buy a life policy that has a relatively large death benefit for a small or modest premium payment (i.e. aleatory contract). And it's effective immediately from the time the policy is issued. It doesn't take years and years of saving and accumulating money to pass to one's heirs.

- Secondly, due to favorable laws that apply to life insurance, a policy's death benefit can pass to a beneficiary without the need for probate or the hassle of complicated estate planning.

Risk Management Methods

- Sharing

- Transfer (e.g. buying an insurance policy)

- Avoidance

- Reduction (Loss Prevention)

- Retention

(Remember: STARR)

Business Uses

of Life Insurance

- Key Person Life Insurance

- Funding for Buy

- Sell Agreements

- Split Dollar Life Insurance

- Deferred Compensation

- Salary Continuation

- Business Overhead Insurance

Key Person

Life Insurance

Business use of life insurance in which a business purchases and is the beneficiary of a life insurance policy insuring a key employee whose death would have adverse effects on the company. Possible uses for death benefit proceeds include:

1) Recruit and train a replacement

2) Replace lost profits resulting from key employee's death

3) Assure potential creditors

Buy-Sell Insurance

Business use of life insurance in which life insurance is purchased to fund a buy-sell agreement for business partners. Under the terms of a buy-sell agreement, the business partners enter into a contract for the transfer/sale of their respective business interests at the occurrence of a specified event, such as death, disability or retirement.

Life insurance is used to provide funds to carry out the agreement upon the death of a partner.

Split Dollar Life Insurance

Business use of life insurance used to help pay for an employee's insurance coverage.

Employer and employee 'split' the premium payments, cash values, and death benefits.

The arrangement usually involves permanent cash value insurance such as whole life or universal life insurance.

Mortality

The rate of death within a given population.

One of the components of life insurance premiums. Insurance companies need to do a good job of accurately predicting these rates so that its life insurance premiums won't be artificially high or low.

Mortality Table

Illustrates the number of deaths for a population at any given age. Insurance companies use this information to help determine appropriate premiums for life insurance and annuities.

It would typically show the number of deaths within a population for each year/age and, consequently, the probability of death for each year/age.

Evidence of Insurability

(E of I)

Any statement or proof of an insured's physical condition and/or other factual information affecting his acceptance for life or disability insurance.

(i.e. application question answers, physical exam, blood, saliva, urine sample, etc.)